about/contact
Digital Audio Insider is David Harrell's blog about the economics of music and other digital content. I write from
the perspective of a musican who has self-released four albums with the indie rock band the Layaways.

My
personal website has links to my LinkedIn and Google+ pages and you can send e-mail to david [at] thelayaways [dot] com.

Adding It Up: Royalties for Song Streams
A reader comment to this post on the Yahoo Music Blog asked "to what extent are we supporting the labels/artists when we listen to music via subscription services? For example, if I listen to an album 200 times ... is the label/artist getting more or less money from me than if I bought the physical CD in the stores?"

If someone actually streamed an entire disc 200 times, the answer is a big "YES."

Here are the current the payout rates that my own band receives for digital streams (via distribution by CD Baby) from the various subscription services. It's possible that some major labels have negotiated higher rates, but from what I've read, I think these rates are fairly standard:

The recent royalty increase from MusicNet (which supplies digital content to Yahoo, Tower, Virgin, and AOL) is huge -- a 10-fold increase over the .2 cents per stream rate that we used to receive, bringing it line with the other services. I'm a bit confused by the Napster payouts -- not sure why there are two rates. In our most recent batch of Napster sales we're receiving both rates for the same songs. My best guess is that the two rates are somehow related to Napster's basic service and the "Napster to Go" option that allows you to transfer the songs to a portable device. Maybe Napster pays a higher rate for the latter.

If a label sells discs to distributors for $6 a unit, it would take about 300 song streams at the 2-cent rate to generate an equivalent dollar amount for the label. Or, for a 12 song album, around 25 listens to the entire album. You'd have to double all of those numbers for a Rhapsody customer or for the lower of the two Napster rates. (However, what I don't know is how the streaming income is paid back to artists on major labels. There's a chance the artist royalty for streams is a smaller percentage than the standard CD royalty rate. Our own records are basically self released, so we see all of the income, minus a 9% cut to the distributor.)

Of course, for artists at any level, any amount of streaming income is better than nothing, so it's not necessarily a question of "do you make more or less with streams than with actual CD sale?" I'd venture that for many artists the streaming income represents an addition to regular CD sales. And in some cases CD sales are lost to streams. On the other hand, I'm sure there are music fans discovering new bands via a subscription service that end up buying the CD as well.

One final thought: It's not inconceivable that a customer might eventually "spend" more on a particular release via streams than by purchasing the physical CD. I used the quotation marks because subscribers to the streaming services don't actually pay for each song, they pay a flat rate each month for unlimited listening. But if someone faithfully listens to a favorite album via a streaming service (as in the hypothetical example from the Yahoo Music Blog comment), the net result could easily be more income to the label and artist.

Cato vs. DMCA
The Cato Institute just posted an analysis titled "Circumventing Competition: The Perverse Consequences of the Digital Millennium Copyright Act." From the executive summary:

The courts have a proven track record of fashioning balanced remedies for the copyright challenges created by new technologies. But when Congress passed the Digital Millennium Copyright Act in 1998, it cut the courts out of this role and instead banned any devices that "circumvent" digital rights management (DRM) technologies, which control access to copyrighted content.

The result has been a legal regime that reduces options and competition in how consumers enjoy media and entertainment. Today, the copyright industry is exerting increasing control over playback devices, cable media offerings, and even Internet streaming. Some firms have used the DMCA to thwart competition by preventing research and reverse engineering. Others have brought the weight of criminal sanctions to bear against critics, competitors, and researchers.

The DMCA is anti-competitive. It gives copyright holders -- and the technology companies that distribute their content -- the legal power to create closed technology platforms and exclude competitors from interoperating with them. Worst of all, DRM technologies are clumsy and ineffective; they inconvenience legitimate users but do little to stop pirates.

Increased Downloads at eMusic, Per-Song Label/Artist Payout Decreases
In an early post on this blog, I wrote about the "royalty" rate for songs downloaded at eMusic. But unlike iTunes, which pays a set royalty per download (currently 70 cents), eMusic doesn't have a standard per-song payout rate. Instead, eMusic pays record labels (and independent artists) a set percentage of its subscriber revenues each month. Basically, a label receives a portion of that revenue share proportional to download activity of its tracks as a percentage of all subscriber downloads for the month. (I'm assuming that eMusic went with this business model because it started out with an "all you can eat" subscription plan, without any limits on the number of tracks subscribers could download each month. A set per-song royalty could have been a big money loser, having a revenue-sharing model caps the total payout at set percentage of subscription income.)

So while the idea of an eMusic "royalty" is something of a misnomer, a per-song rate is eventually worked out for each month, probably calculated by dividing the revenue share amount by the total number of downloads for the month. The resulting payout is therefore inversely correlated to the total number of tracks that eMusic subscribers download each month: Fewer subscriber downloads means more money paid out for each download, more downloads means less money paid per track. There is a limit to how low this rate can drop, however. That limit would be reached if/when ALL subscribers maxed out their downloads each month.

Back in May 2005, the first month I have sales data for, the per-song rate for eMusic downloads was 24 cents. By November 2005, the most recent month I have numbers for, that rate had dropped to 19 cents per download. Hence, my best estimate is that total download activity by active eMusic subscribers increased approximately 20% during that time. (I'm not talking about the number of subscribers, which no doubt increased as well, I'm referring to the average number of tracks that subscribers downloaded each month.) In December, eMusic president David Pakman said that the average eMusic subscriber was downloading 31 tracks for month. Given that cheapest eMusic subscription plan allows for 40 downloads a month, the per-song payout probably has room to drop some more, if average subscriber downloads approach the monthly limits.

But as someone with a couple albums distributed by eMusic, I have no complaints. Even though the current per-song payout is less than 1/3 of what we receive from iTunes, I'm confident that we'll have more sales via eMusic, perhaps enough to offset the lower "royalty rate." I think the "use it or lose it" aspect of the eMusic subscription plan makes subscribers more likely to take chances on unknown artists. (Using up 10 of your expiring downloads to check out a new artist is very different than paying $9.99 for that same album on iTunes.)

And from a subscriber standpoint, I think this model is a good thing -- it means that eMusic has no incentive to minimize download activity. That is, if eMusic paid a set royalty for each download, eMusic's profit would increase with each download "left on the table" and the company's preference might be for its subscribers to not make full use of their monthly allotment. Which is happening now with Netflix, where the associated costs of "unlimited" movie rentals is causing the company to throttle its customers to limit the number of movies they can rent each month. With eMusic, the company has every incentive for subscribers to realize the full value of their subscriptions -- the more you use your eMusic subscription, the less likely you are to cancel it.

The iPod Company?
That's what Apple's turning into, if the trend from late last year continues. In its new 10Q report, it lists sales of $5.749 billion for the last quarter of 2005, $2.906 of it coming from iPods. (Compared to only $1.724 billion for laptop and desktop machines.)

That means 50.5% of Apple's business for the quarter was from iPod sales. A year ago, it was 34.7%. If you add in the $491 million listed for sales of "Other music related products and services," it brings the music-related portion of its business up to nearly 60% of sales. No wonder Apple's rolling out iPod speakers and cases, it's become their main business.

The 10Q doesn't break out margins, however, so I don't know if iPods represent 50%+ of Apple's profit. And maybe holiday iPod purchases during the fourth quarter skew the trend somewhat. But I've always read that the iPod is highly profitable (and that iTunes sales are a break-even proposition.) Perhaps the old "home computer marketshare" debate has become a moot point for Apple. Plus, if a true video iPod comes out later this year, Apple will reach a whole new market.

Despite stories like this one about increased competition (Samsung, Sony, Toshiba, etc.) in mp3 player market, I'm convinced the iPod will remain the dominant music player for at least the next few years. Mainly because Apple's managed to define the market -- I'd guess that a large percentage of iPod purchasers don't even realize that alternative products are available. And unlike the Mac/PC battle, where Mac users paid a hefty price premium, at this point iPods are very competitive in terms of $/gig, aside from the design advantage. As a stock analyst co-worker put it, "they've possibly cornered the market on hard drives that size (and get good pricing from their suppliers because of it)."